How Nigeria can enhance mortgage penetration
One of the main determinants of housing affordability is the cost and availability of housing credit, both short-term construction credit and long-term mortgage credit.
Advantages of mortgages are many and cannot be over-emphasised either for an individual, the real estate industry, business or the government, mortgages are important.
It enables people, families, and low-income earners with limited resources in particular to accomplish the goal of homeownership, which is regarded in many cultures as a fundamental component of livelihood.
Through mortgages, borrowers can access a substantial amount of money that can be used for a variety of purposes, such as starting a business, consolidation of debts, making home upgrades or even for schooling. Real estate business and property transactions are more effectively driven by mortgage.
There are no better tools for investors in developing wealth and financial security. By leveraging borrowed funds to purchase a property, investor’s benefit from the property’s value appreciation over time, and this can lead to equity accumulation and a long-term investment. Mortgages are perfect enhancers of the performance of the economy in addition to stimulating growth, investment and income for real estate practitioners, primary mortgage institutions and mortgage lenders.
Majority of money in the modern economy is created by commercial banks’ loans. All these imply that mortgages are extremely important to a working financial system. Countries with a higher mortgage penetration rate naturally have more homeowners than renters because a working and effective mortgage system usually encourages home ownership.
The United States of America relied on mortgage driven homeownership as a means of wealth building for most of the 20th century. Each European country has its separate dynamics on the mortgage market and how mortgages are provided, as there are differences on taxation and rules on economic protection. Borrowing money has effectively become affordable for consumers due to the monetary policy of the European Central Bank and its artificially low interest rates.
Homeownership is a daunting challenge in Nigeria due to our poor mortgage system, which has made many to depend on personal savings to build a house. Even with the introduction of Public Private Partnership to shelter the teeming population, homeownership has remained a herculean task, and solutions seem not to be in sight. This is compounded by economic crunch, high unemployment rate, rising inflation rate, lack of finance, a dearth of long-term loans, stringent lending criteria and the high-interest rates that lenders demand. The country’s benchmark interest rate of about 18.5 per has made mortgage loans more difficult and unaffordable for many.
The National Housing Fund (NHF) Scheme has not made any significant difference. Established via the NHF Act of 1992, Nigerians of 21 years old and above in paid or self employment are to contribute 2.5% of their basic monthly salary to NHF through the Federal Mortgage Bank of Nigeria (FMBN). This would qualify a contributor to access a loan of #15 million for building, purchasing a house or for renovation of one.
But then, we could change the game for the better. Going forward requires a combination of political will and capacity building. Government-backed mortgage guarantee schemes, which decrease lender risk and encourage lenders to offer mortgage loans to a broader spectrum of borrowers, including those with lower incomes is a good idea.
Reducing the cost of mortgages would automatically increase their attractiveness; make more affordable financing choices available to homebuyers, which will result in higher rates of mortgage penetration. There is the need to maintain the macro economic variables via disciplined fiscal and monetary policies for stable growth and low inflation to support low interest rates.
Government should endeavour to promote liquidity of the mortgage industry at single digit interest rates via the Nigeria Mortgage Refinance Corporation (NMRC) and Family Home Fund (NHF). Key is that the private sector via mortgage banks retains the role of underwriting mortgages directly and this will boost effective demand for homes. It is important to stress again that the core focus of the government should be on how to control inflation in the long run to allow for single digit interest rates, rather than just intervention policies.
NHF scheme may have to be subjected to review amidst calls by Nigerian workers for its review, complaints by employees in the private sector that they have been exempted from contributing to the fund, and most particularly, in view of the economic realities of the day. Factors of inflation, cost of building and a few other economic indices have rendered #15m grossly inadequate to secure a decent housing unit of any size.
Government needs to strengthen its legal and regulatory framework for mortgages, including property rights, land registration, and foreclosure procedures to enable a viable and robust mortgage system. Clear and unambiguous property rights, fast land registration processes, and well-defined foreclosure procedures can give lenders and borrowers better security, perhaps leading to additional mortgage lending.
A major hindrance to housing development and availability, either through mortgage or otherwise in Nigeria is the Land Use Act. Land should be accessible to people who are under the umbrella of cooperatives, institutions, and private establishments, among others who are willing to develop. It is time to review the Land Use Act, which came into effect in March 1978.
Omorinoye is an Abuja-based Estate Surveyor & Valuer.
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